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Forensic Accounting –More Than You Think
Presented by:
Howard A. Zandman, CPA/CFF, CFFA
August 19, 2011
Pathway to Forensics
IntroductionObj tiObjectivesDefinitionThe BusinessThe ProcessThe ApplicationThe ApplicationCase StudiesSource Materials
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WELCOME !WELCOME !
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•Partner with Habif, Arogeti & Wynne, LLP•More than 35 years experience •Majority of that time dedicated exclusively to the area of forensic accounting and litigation support
Howard Zandman, CPA/CFF, CFFA
of forensic accounting and litigation support. •Has managed a wide variety of cases including fraud and damages quantification•Testified many times in both Federal and State Courts•Regularly presents to groups, including, GSCPA, NACVA, and others – Current member of NACVA Executive Advisory Committee•Licensed as a CPA in the States of Georgia, New York and FloridaLicensed as a CPA in the States of Georgia, New York and Florida•Authored the “Small Business Section,” of the CPA’s Handbook of Fraud and Commercial Crime Prevention, “Business Interruption Basics”, “Not Exactly CSI”, “Delay versus Lost Profits Damages”, and other articles.
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Who Are You
Your Credentials
Your Experience
Number of Years
Your Interest in this SessionUnderstanding of Field
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g f
A & A Credit
Objectives
To Understand what is “Forensic Accounting”
To Understand the Business of Forensic Accounting
To Understand the Investigative Process
To Understand the Litigation Process
Practice Tips
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DisclaimerDisclaimer
Opinions expressed are mineOpinions expressed are mine and not necessarily those of my firm. They are not intended to override anything that might otherwise be printed in the
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pvarious AICPA Practice Aids.
Definition of Forensic
“Belonging to, used in, or suitable to courts of law”
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What is Forensic Accounting
The relation and application of accounting knowledge and financialaccounting knowledge and financial skills to a business problem within a legal environment.
“Forensic Accounting" provides an accounting analysis that is suitable to the
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accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution".
Economic Damages
What Is
Audit/Review Compilation
PI, WD
Malpractice
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Internal Audit
Fraud
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11Business of Forensics
What is a Forensic AccountantSkills of a Forensic Accountant
The application of financial knowledge and accounting skills, in conjunction with investigative techniques, to investigate disputesthat are financial in nature
Trained to look “beyond the
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Trained to look beyond the numbers” and communicate financial information clearly in a courtroom setting
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What is a Forensic AccountantSkills of a Forensic Accountant
Familiarity with legal concepts and procedures
Be able to identify substance over form
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What is a Forensic AccountantForensic Accountant Skills
▀ An investigative mindsetg▀ Investigative strategies
and techniques▀ Interview skills▀ Rules of evidence▀ Lateral thinker
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▀ Lateral thinker▀ Negotiation strategies▀ Excellent communicator▀ Courtroom experience
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“As most of you know, our company treasurerwon’t be with us for the next fifteen
annual meetings.”
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“Not a lot of clues, Chief! We foundone footprint.”
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Where are Forensic Accountants
▀ Engaged in public practiceg g p p▀ Corporations▀ Boutique firms▀ Insurance company personnel▀ Law Firms▀ Bank staff
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▀ Bank staff▀ Law enforcement▀ Other government agencies▀ Other misc organizations
A Forensic Accountant What we do
Internal AuditinggTax AccountingValuation ProfessionalsLitigation Support
Economic Damage QuantificationCorporate Internal Investigations
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Corporate Internal InvestigationsWhite Collar Crime Investigations
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Business of ForensicsRoles of the Forensic Accountant
Investigation and Development and use of analysis of financial evidence in a business dispute;
investigative methodologies to assist in the analysis and presentation of financial evidence;
Communication of investigative findings
Maintain independence – be an advocate for your
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investigative findings and opinions (reports, schedules, expert witness testimony); and
an advocate for your opinion not for the position of the client.
Business of Forensics“An Investigative Mentality”
In order to properly perform these services a forensic accountant must be familiar with legal concepts and procedures. In addition, the forensic accountant must be able to identify
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must be able to identify substance over form when dealing with an issue (e.g. cash flow vs. financial statement presentation).
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Business of ForensicsDefinition of a Financial Audit
The review of financial statements of a company by a CPA leading to an independent opinion on the fairness of those statements which adds credibility to the implied
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adds credibility to the implied assertions by management.
Business of Forensics
Opinion on management’s
Definitive investigation of
Auditing Forensic AccountingVs.
financial statementsRely on management representationsConcept of materialityWork from sample
investigation of specific issuesAttitude of heightened skepticismDetail mattersReview all relevant
of dataFinancial statement oriented
Review all relevant dataUncover the facts, tell a story
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Business of Forensics
GAAP/GAAS must be adhered to -
An intuitive processis applied
Auditing Forensic AccountingVs.
be adhered to checklist orientationVerification of the past or overview
Focus on expected patterns
is applied
Investigate the events surrounding specific transactions/activitiesFocus on unusual patterns & exceptionspatterns
& transactionsOngoing client relationship
patterns & exceptions
Independent, reactive
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Involvement of the Forensic Accountant
Business Economic Losses Business Interruption / Other Types of
Insurance ClaimsPersonal Injury / Wrongful Death
Claims
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ClaimsShareholders' and Partnership DisputesContract Disputes
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Involvement of the Forensic Accountant
Matrimonial DisputesMgmt/Employee Fraud InvestigationsCriminal Fraud InvestigationsProfessional Negligence
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Mediation and Arbitration
Role of the Forensic Accountant
Investigate and analyze financial idevidence
Develop computerized applications to assist in the analysis and presentation of financial evidence;
Communicate findings in the form of
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reports, schedules and exhibits; and
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Role of the Forensic Accountant
Assist in legal proceedings, including:
Giving a deposition,
Assist at opponents deposition
Prepare visual aids to support trial evidence
Testify in court as an expert witness
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Testify in court as an expert witness
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The Process
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Professional GuidanceAICPA Authoritative Standards
SSCS 1
Rule 201
Professional Competence
Due Care
Planning and Supervision
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Sufficient Relevant Data
Rule 202
Integrity and Objectivity
Understanding with Client
Professional GuidanceAICPA Authoritative Standards
SSCS 1
Rule 102
Conflicts
Rule 302
Contingent Fees
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Rule 301
Confidential Client Information
SSVS 1
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Professional GuidanceAICPA Non‐Authoritative Guidance
Practice Aids
96 03 C i ti i Liti ti S i96‐03 Communicating in Litigation Services Reports
98‐02 Calculations of damages from Personal Injury, Wrongful Death and Employment Discrimination
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03‐01 Consulting Services Special Report
04‐01 Engagement Letters for Litigation Services
05‐01 A CPA’s Guide to Family Law Services
Professional GuidanceAICPA Non‐Authoritative Guidance
Practice Aids
06‐01 Calculating Intellectual Property g p yInfringement Damages
06‐02 Preparing Financial Models
06‐03 Analyzing Financial Ratios
06‐04 Calculating Lost Profits
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08‐01 Independence, Integrity and Objectivity
09‐01 Introduction to Civil Litigation
10‐01 Serving as an Expert Witness or Consultant
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Planning the Engagement
Accepting the engagemento Conflict checks
o Discussion with client and/or client’s attorney
o Client understanding of scope• Engagement Letters
Information gatheringInformation gathering
Interviewing
Discovery
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The Investigative Process
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SufficientDealt with Internally(Fidelity)
An Investigation Information Reaction
Strategye-
GovernmentLitigation
to Decide Criminal
Overall objective is to recover losses whether from Fraud or Breach of Contract35
Identifying the Issues - InvestigativeIdentifying the Issues - Investigative
Investigative Issues
If Fraud
How much was Stolen?
Time Period
Who, What, When, Where?
Historical
If Business Dispute
Liability
Investigate & Quantify Loss
Expert Report (Plaintiff)
Past & Future Damages
Documents Required
Source & Availability
Expert Report
Expert Rebuttal (Defendant)
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Investigative Process
SAS 99 o applies to audits of all nonpublic entities, private pp p , pcompanies, non‐profits, government units, etc.
Why auditors fail to detect fraudFraud in the accounting systemo Misappropriation of AssetsManaging earningso Misstatement from fraudulent financial reportingf f f p gRed FlagsFraud v. Damageso Healthy degree of skepticism
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Investigative ProcessFraud Audit Process
Brainstorming
Documenting
Communicating
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Obtaining Risk Info
Identifying Risks
On‐GoingProcess
ThroughoutThe Audit
Evaluating Evidence
Responding toRisks
Assessing Risks
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The Litigation Process
Litigation Process
Where do engagements come from?
Why do you get retained
How does one get retainedo Relationships Matter
o Curriculum Vitae (“CV”)
Wh d t t i dWhen does one get retained
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Litigation ProcessManaging the Case
Maintenance of file datao Notes
o Emails
To checklist or not to checklist?o Consulting expert vs.
o Testifying experto Testifying expert
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Litigation ProcessUnderstanding the Rules
PleadingsC l i t ( d A d d C l i t)o Complaint (and Amended Complaint)
o Motions
Discoveryo Interrogatorieso Requests for Productiono Requests for Admissionso Depositionso Subpoenas
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Litigation ProcessUnderstanding Requirements
Reportso Know your jurisdiction• Family Court
• State or Local Courts– Civil v Business v Criminal
• Federal Court– Civil v CriminalCivil v Criminal
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Litigation ProcessUnderstanding Requirements
Federal Rule of Evidence (“FRE”)R l 702 A ti l VIIo Rule 702 – Article VII• Opinions and Expert testimony
– Daubert / Khumo Tire
Federal Rule of Civil Procedure (“FRCP”)o Rule 26(a)(2)(B) – Amended Dec 2010 • Expert Discovery – ReportsExpert Discovery Reports
– Basis of opinion– Information relied upon– 4 years of testimony– 10 years of publications / presentations
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Credentialing Organizations
Certified in Financial Forensics (“CFF”)o AICPA
Certified Forensic Financial Analyst (“CFFA)o NACVA
Certified Fraud Examiner (“CFE”)A i ti f CFEo Association of CFE
Certified Forensic Accountant (“Cr FA”)o American College of Forensic Examiners
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Litigation StoriesThe Application
Construction Caseso Fun Park delayo Fun Park delayo Garage collapse
IP Caseso Accounting firm “trade secrets”El i f d lo Electronics software delay
o Use of similar logoo Generic drug manufacturer
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Litigation StoriesThe Application
Lost Profitso Major golf resort hotel affected by Hurricanes Katrina and Wilma
o Industrial drum recycling plant destroyed by fire
o Gov’t sponsored military charter air carrier sued by another for “putting it out of business”
o Metal recycler opens new plant, has fire and claims lost profits
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Litigation StoriesThe Application
FraudM j FL h i b d bo Major FL grocery chain succumbs to produce buyer
o Dissipation of assets by former spouse
o Major car dealership “gives” cars away
o Investment loss
FINRA issueso Broker – Dealer swaps
o Broker Churning
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PRACTICE TIPSPRACTICE TIPS
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As accountants, we have a wide array of capabilities. However, do not step into the pile unless you know what the pile is made of
Practice Tips
Understand who your client is and who is responsible for fee
Always get hired by the attorney. Evaluate who the attorney is that is hiring you
Ask for retainers. If client negotiates on, or refuses, retainer, evaluate strength of client and case
Carefully evaluate the last minute assignment It is YOUR reputation onCarefully evaluate the last minute assignment. It is YOUR reputation on the line
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Source Materials
SSCS 1
SSVS 1
AICPA Practice Aids
Litigation Support Serviceso Practitioners Publishing Company (“PPC”)
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Source Materials
Litigation Services Handbooko The Role of the Financial Experto The Role of the Financial Expert
• Weil, Frank, Hughes and Wagner
Recovery of Damageso For Lost Profits
• Robert L. Dunn
The Comprehensive Guide to Lost Profits DamagesN J F dito Nancy J. Fannon – editor
Measuring Business Interruption Losses and Other Commercial Damageso Patrick A. Gaughan
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Questions and AnswersQuestions and Answers
THANK YOUTHANK YOU:
Howard Zandman, Habif, Arogeti & Wynne, [email protected](404)‐814‐4915
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